Wednesday, December 21, 2016

The U.S. Court of Appeals for the Fourth Circuit recently held that claims against a bank under North Carolina's Unfair and Deceptive Trade Practices Act ("UDTPA") were barred by the four-year statute of limitations, because the plaintiff was or should have been aware within the limitations period of all the information that led it to file suit.

The Court also held that relationship between the plaintiff and the bank was an ordinary contractual relationship, and not a fiduciary relationship that would give rise to the plaintiff's constructive fraud claims.

This action arose from a "seller holdback" agreement between an investment corporation that was selling a vacant lot for home construction, and a bank that was financing the lot's purchase by a third party individual.

Under the 2008 "seller holdback" agreement, part of the purchase price owed to the corporation would be retained by the bank, pending completion of the home and subject to certain conditions. The corporation entered into the agreement after consulting with its attorney, its banker, and a real estate appraiser.

To secure payment of the holdback amount, the investment corporation also obtained a note signed by the third party buyer, along with a deed of trust on the same collateral property.

In 2010, the bank notified the third party buyer that the "seller holdback" loan had come due and that failure to make payments on the loan had put the loan into default. On March 30, 2012, the bank foreclosed on the collateral property.

Although the investment corporation's promissory note from the third party buyer was also secured by a deed of trust on the same collateral property, the corporation did not assert any security interest in connection with the bank's foreclosure.

Over four years after entering into the "seller holdback" agreement, the investment corporation sued the bank in state court, alleging that the bank fraudulently induced it to enter into the seller holdback agreement, in supposed violation of North Carolina's Unfair and Deceptive Trade Practices Act ("UDTPA"), and for claims under the common-law doctrine of constructive fraud. The bank removed the action to federal district court.

The trial court granted summary judgment to the bank, holding that the investment corporation's UDTPA claim was barred by the four-year statute of limitations. The district court also concluded that the investment corporation could not establish the necessary elements of a constructive fraud claim.

The investment corporation then appealed to the Fourth Circuit.

As you may recall, when a UDTPA claim is based on alleged fraudulent conduct, the limitations clock starts running when the fraud is discovered or should have been discovered with the exercise of reasonable diligence.

The investment corporation argued that it would be more appropriate to analogize its action to one for breach of contract, in which case the 4-year limitations period would begin to run at the time of the breach, asserting that the earliest date on which it could have discovered or been expected to discover the bank's alleged fraud was in 2009, within the four-year limitations period, when the individual received the certificate of compliance on his home.

The investment corporation contended that it was not until then, when the bank was required to make good on the "seller holdback" agreement by releasing the holdback to the corporation, that the corporation could have known that the bank did not intend to honor the agreement.

The Fourth Circuit disagreed, noting that the investment corporation made it clear that its claim was based on deceptive statements made by the bank in order to induce the corporation to enter into a sham seller holdback scheme.

Moreover, the Court noted that in 2009, the investment corporation had already announced that it planned to sue the bank on the same theory. In other words, the Court said, the investment corporation was already privy to the information that ultimately led it to file suit more than four years later.

The Court held that the investment corporation could not, therefore, claim that it lacked capacity and opportunity to discover that fraud until six months later.

Accordingly, the Fourth Circuit concluded that the limitations period on the investment corporation's UDTPA claim began running by in 2009, more than four years before it filed suit. The Court therefore agreed that, with respect to the UDTPA claim, the trial court properly granted summary judgment to the bank on statute of limitation grounds.

The Fourth Circuit next turned next to the investment corporation's constructive fraud claim, on which the trial court also granted summary judgment to the bank.

Under North Carolina law, the key to a constructive fraud claim is a fiduciary relationship between a plaintiff and a defendant, which gives rise to a special duty to act in good faith and with due regard to the interests of the one reposing confidence.

When such a fiduciary relationship exists a plaintiff need not bear the exacting burden of proving actual fraud, but may instead rely on a presumption of constructive fraud that arises under equity when the superior party obtains a possible benefit.

The bank argued that the investment corporation could not show such a relationship in this case, and the Fourth Circuit agreed.

Under North Carolina law, fiduciary relationships are characterized by confidence reposed on one side, and resulting domination and influence on the other.

Lawyers and their clients, for instance, or trustees and their beneficiaries, share such relationships, with a "heightened level of trust" matched with a corresponding duty to "maintain complete loyalty."

By contrast, parties to a contract like the seller holdback agreement between the bank and the investment corporation generally do not become each other's fiduciaries; what they owe each other is defined by the terms of their contracts, with no special duty of loyalty.

The Fourth Circuit, relying on Strickland v. Lawrence, 176 N.C. App. 656, 627 S.E.2d 301, 306 (N.C. Ct. App. 2006), held that as a matter of law, there can be no fiduciary relationship between parties in equal bargaining positions dealing at arm's length, although they are mutually interdependent businesses.

The Fourth Circuit held that that the relationship between the bank and the investment corporation was an ordinary contractual relationship, with nothing that could give rise to a special fiduciary relationship. Because the existence of a fiduciary relationship is a necessary element of constructive fraud, the Court concluded that the trial court properly granted summary judgment to the bank on this claim.

Accordingly, the Fourth Circuit affirmed the trial court's summary judgment in favor of the bank.

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Monday, December 19, 2016

The U.S. Court of Appeals for the First Circuit recently bankruptcy trustee's effort to avoid a mortgage on the basis that the acknowledgment signed by the borrowers' attorney-in-fact was defective under Massachusetts law, holding that the acknowledgment was not materially defective because as a matter of agency law the attorney-in-fact's signature was the borrowers' "free act and deed."

The borrowers purchased a parcel of "registered land" in 1994 in North Attleboro, Massachusetts (the "subject property"). "Registered land" is real property for which a certificate of title is recorded with the Massachusetts Land Court, governed by chapter 184 of the Massachusetts General Laws.

In April of 2004, the borrowers signed a power of attorney authorizing their attorney-in-fact to execute a mortgage encumbering the subject property. The attorney-in-fact subsequently signed a note and mortgage, which were "registered on the certificate of title" for the property in the Registry of Deeds of the Massachusetts Land Court for the county where the property was located.

Attached to the mortgage was a certificate of acknowledgment, signed by the attorney-in-fact, which attested that he appeared before the notary to sign the mortgage on behalf of the borrowers.

The borrowers filed separate bankruptcy cases. The bankruptcy trustee appointed for both cases then filed an adversary proceeding against the original lender's successor-in-interest seeking to avoid the mortgage pursuant to 11 U.S.C. § 544(a)(3), which "put[s] the estate in the shoes of the creditor whose lien is avoided."

The two adversary actions were consolidated. In the consolidated action, the trustee argued that subsection 544(a)(3) permits him to avoid the subject mortgage where such a transfer is voidable under state law by a bona fide purchaser, section 29 of chapter 183 of the Massachusetts General Laws requires a valid certificate of acknowledgment along with the recorded mortgage, and the subject mortgage was voidable because the certificate of acknowledgment was "materially defective" under section 29.

Specifically, the trustee argued that the certificate of acknowledgment was "materially defective" because it did not clearly state the mortgage was signed as the "free act and deed" of the borrowers. If only the attorney-in-fact appeared to sign, the bankruptcy trustee argued, then it was his "free act and deed" while acting under the power of attorney, not that of the borrowers.

The mortgagee filed a motion to dismiss, arguing:

(a) section 29 did not apply to the subject mortgage because that section is part of chapter 183, which governs "recorded land" and the encumbered property is "registered land," governed by chapter 185;

(b) if section 29 did apply, the certificate of acknowledgment complied with its requirements because it made clear that the execution of the mortgage was the free act and deed of the borrowers; and

(c) even if the certificate of acknowledgment did not comply with the formal requirements of section 29, it still provided constructive notice of the mortgage to bona fide purchasers, which is all that state law requires to prevent a bona fide purchaser from voiding the mortgage.

The mortgagee also filed a motion asking the bankruptcy court to certify to the Massachusetts Supreme Judicial Court "the question of whether a 'mortgage encumbering registered land, whose certificate of acknowledgment is … ambiguous regarding whether the execution … was the voluntary act of the mortgagors, but which … is noted on the certificate of title of such registered land, provides constructive notice.'"

The motion to dismiss was converted into a motion for summary judgment, after which the bankruptcy court denied both motions, ordering the mortgagee to show cause why summary judgment should not be entered in the trustee's favor.

After briefing, the bankruptcy court granted summary judgment in the trustee's favor, finding that (a) a certificate of acknowledgment was required for the subject mortgage by section 29, even though the property was "registered land;" (b) the certificate of acknowledgment at issue was ambiguous as to who appeared before the notary; (c) this rendered it materially defective because it was unclear whether the execution of the mortgage was the free and act deed of the mortgagors; and (d) the defective certificate of acknowledgment and other loan documents did "not suffice to provide constructive notice of the mortgage to a bona fide purchaser."

The mortgagee appealed the bankruptcy court's order to the district court, which reversed the bankruptcy court's summary judgment ruling in favor of the trustee because the certificate of acknowledgment was not materially defective. The trustee appealed the district court's order to the Circuit Court of Appeals.

On appeal, the First Circuit concluded that the certificate of acknowledgment complied with section 29 of chapter 183 and was not materially defective because even if it were read to reflect that only the attorney-in-fact appeared before the notary, it "still [did] all that it needed to do."

The Court held that this is because the certificate of acknowledgment expressly stated that the attorney-in-fact was appearing for the borrower under the power of attorney recorded along with the mortgage, and the power of attorney specifically authorized the attorney-in-fact to sign the mortgage.

In addition, the First Circuit held, the certificates of acknowledgment accompanying the power of attorney stated that the borrowers each signed the power of attorney forms "voluntarily for [their] stated purpose." Under the common law of agency in Massachusetts, the voluntary act and deed of an agent acting within the scope of his authority "was the voluntary act and deed do his principal."

The Court rejected the trustee's argument that certificate of acknowledgment at issue was defective because its language differed from the official form for an individual acting under a power of attorney in an appendix to chapter 83 and the model certificate of acknowledgment published by the Land Court.

The First Circuit reasoned that even though the language differed, the subject certificate of acknowledgment made clear that the attorney-in-fact appeared as the borrowers' attorney pursuant to the recorded power of attorney forms, which in turn clearly reflected that the borrowers "voluntarily granted the power to execute the mortgage to [the attorney-in-fact]. And, indeed, the [borrowers] acknowledged those power of attorney forms as their fee act and deed." The Court held that nothing more was required under section 29.

Finally, the Court explained that the form acknowledgments were permissive, not mandatory, and the Massachusetts Supreme Judicial Court had confirmed that "[t]he acknowledgment required for proper recording of a mortgage … need not take any one specific form."

Accordingly, the First Circuit affirmed the district court's order in favor of the mortgagee.

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Ralph Wutscher's practice focuses primarily on representing depository and non-depository mortgage lenders and servicers, as well as mortgage loan investors, distressed asset buyers and sellers, loss mitigation companies, automobile and other personal property secured lenders and finance companies, credit card and other unsecured lenders, and other consumer financial services providers. He represents the consumer lending industry as a litigator, and as regulatory compliance counsel.

Ralph has substantial experience in defending private consumer finance lawsuits, including cases ranging from large interstate putative class actions to localized single-asset cases, as well as in responding to regulatory investigations and other governmental proceedings. His litigation successes include not only victories at the trial court level, but also on appeal, and in various jurisdictions. He has successfully defended numerous putative class actions asserting violations of a wide range of federal and state consumer protection statutes. He is frequently consulted to assist other law firms in developing or improving litigation strategies in cases filed around the country.

Ralph also has substantial experience in counseling clients regarding their compliance with federal laws, and with state and local laws primarily of the Midwestern United States. For example, he regularly provides assistance in connection with portfolio or program audits, consumer lending disclosure issues, the design and implementation of marketing and advertising campaigns, licensing and reporting issues, compliance with usury laws and other limitations on pricing, compliance with state and local “predatory lending” laws, drafting or obtaining opinion letters on a single- or multi-state basis, interstate branching and loan production office licensing, evaluations and modifications of new or existing products and procedures, debt collection and servicing practices, proper methods of responding to consumer inquiries and furnishing consumer information, as well as proposed or existing arrangements with settlement service providers and other vendors, and the implementation of procedural or other operational changes following developments in the law.

Ralph is a member of the Governing Committee of the Conference on Consumer Finance Law. He is also the immediate past Chair of the Preemption and Federalism Subcommittee for the ABA's Consumer Financial Services Committee. He served on the Law Committee for the former National Home Equity Mortgage Association, and completed two terms as Co-Chair of the Consumer Credit Committee of the Chicago Bar Association.

Ralph received his Juris Doctor from the University of Illinois College of Law, and his undergraduate degree from the University of California at Los Angeles (UCLA). He is a member of the national Mortgage Bankers Association, the American Bankers Association, the Conference on Consumer Finance Law, DBA International, the ACA International Members Attorney Program, as well as the American and Chicago Bar Associations.

Ralph is admitted to practice in Illinois, as well as in the United States Court of Appeals for the Seventh Circuit, the United States District Courts for the Northern and Southern Districts of Illinois, and the United States District Court for the Eastern District of Wisconsin, and has been admitted pro hac vice in various jurisdictions around the country.